Rethinking Risk

risk management Feb 23, 2017

Look up the word “risk” in every English dictionary and you will see it defined as a chance or probability of loss, injury, or harm.  Games of chance date back to ancient times, with gambling being a part of society since the beginning of recorded history.  Probability theory evolved in the seventeenth century based upon mathematical efforts to predict the outcome of a game of chance.

Chance and probability rely on odds and statistics.  These are the mainstay of casinos and insurance companies.  Imagine a casino not knowing the odds of bets placed on the spin of a roulette wheel, or an insurance company not having the statistics on automobile accidents.  Either of these industries would be out of business if they did not have the right information.

Most businesses, however, operate in a world of uncertainty.  As an example, while the insurance company has the statistics on automobile accidents, they mean nothing to us.  We don’t know when a vehicle owned by the business will be in an accident, or if it will even happen at all.  The same holds true for all risks faced by the organization, whether insured or otherwise handled.

While insurance companies and casinos depend on probabilities, the best most of us can do is to consider the possibilities.  When making decisions about the likelihood of an event that may positively or negatively affecting the achievement of our objectives, we have to be careful about falling into the trap of relying on statistics. 

We can comprehend the consequences of an event, even if we don’t know how likely it is to occur.  We may not know when an earthquake could occur, but we can imagine how we might be affected by one.  Focusing on the consequences rather than the probability is the central idea of uncertainty.

I am unsure about its origin, but the Precautionary Principle reminds us about our limitations in knowledge about the future.  It applies to the management of risks where there is a high level of consequences, and likelihood is believed to be close to zero, but not zero.  In such cases the risk should be treated even though the effects of the treatment may also be uncertain.

Risk and uncertainty are not the same as they require different thinking when making decisions.  Most of the time we are really managing uncertainty, and we need to be sure we are responding in the proper manner.  If we are going to make better decisions, we need to rethink risk.

Download my free eBook, Decision SMART, to learn more.